In Banking, It's Survival of the Fittest
By LAWRENCE C. STRAUSS and ANDREW BARY | MORE ARTICLES BY AUTHOR
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THE DIVISION BETWEEN THE STRONG AND THE WEAK in banking is coming into sharp relief after JPMorgan Chase 's stunning deal for the failed Washington Mutual.
Shares of JPMorgan Chase (ticker: JPM) jumped 11% Friday, as investors applauded the latest bold move by CEO Jamie Dimon. Strong brethren like Wells Fargo (WFC) also rallied.
[Dimon photo]
Carol T. Powers/Bloomberg News
JPMorgan chief Jamie Dimon has again walked away with attractive assets at what seems a good price. The WaMu deal also creates a bi-coastal behemoth.
But the deal, which came in tandem with WaMu's seizure by the government, sent shockwaves through the stock and bond markets as investors speculated about which banks would fall next.
The two most prominent potential casualties were Wachovia (WB) and National City (NCC). Wachovia shares closed at 10 Friday, down 27% on the day, and another 12% after hours. It reportedly was in talks to be acquired by Citigroup, Wells Fargo or Banco Santander of Spain.
National City closed at 3.71, down 26%.
The WaMu seizure, by far the largest ever, was a rude reminder that shareholders aren't the only investors who suffer in government takeovers. With WaMu, the victims also include preferred holders, who are apt to be wiped out. Holders of some $30 billion of WaMu debt are expected to suffer sizable losses. The company's senior debt traded anywhere from 20 to more than 30 cents on the dollar, down from 80 recently.
Unlike a host of financial firms, which have been decimated by credit-related write-downs and attempts to raise more capital, JPMorgan Chase has seen its shares hold up relatively well. In fact, it announced Friday that it raised an additional $10 billion in common stock, strengthening its balance sheet on the heels of a $31 billion write-down of loans acquired from WaMu.
[WAMU stk cht]
Investors and analysts were quick to applaud the WaMu acquisition, for which JPMorgan Chase paid $1.9 billion. It said the deal, which gives it a presence in some key states, should boost its profits right away.
"The strategic merit of the deal is bulletproof," says Jeff Arricale, portfolio manager of the T. Rowe Price Financial Services Fund (PRISX). "The financial merit of the deal makes sense in all but the most severe recessionary scenarios."
[chart]
The deal will make JPMorgan Chase the industry's largest holder of deposits -- at a time when the stability of deposit-based financing is coveted. "Deposit franchises are where you want to be right now," says Dave Ellison, who runs the FBR Large Cap Financial Fund (FBRFX), pointing also to Wells and Bank of America (BAC) as other examples. "Those are the companies you want to own."
Because WaMu is a thrift, JPMorgan Chase is not subject to a law that prohibits banks from having more than 10% of the deposit market nationwide. The WaMu deposits total about $170 billion. JPMorgan Chase plans to cut about 10% of its combined network of 5,410 branches.
"Strong firms are taking advantage of market dislocations, and the strong will only get stronger in this environment," says Jerry Senser, chief executive of Institutional Capital.
The deal will give JPMorgan Chase a strong presence in the lucrative California and Florida markets, where it largely has been absent. "It would be very hard for us to replicate this by building it ourselves," Mike Cavanagh, JPMorgan Chase's chief financial officer, tells Barron's.
Goldman Sachs analyst William Tanona projects JPMorgan Chase will earn $3.95 next year, up from his previous estimate of $3.45. But in a note dated Friday, Tanona lowered his third-quarter and 2008 estimates, citing the "the more challenging current environment."
The Bottom Line
Banks with big deposit bases and stable franchises -- like JPMorgan Chase, Wells Fargo and Bank of America -- seem like the best bet for investors as the financial storms intensify.
JPMorgan Chase's shares do look reasonably priced. They fetch about 1.1 times book value, well below their five-year average of 1.4, says Tanona.
The WaMu takeover was not a repeat of JPMorgan Chase's deal for Bear Stearns. There, shareholders got about $10 a share, while preferred and debt holders came out whole. That may have given investors a false sense of security.
Among the many losers from WaMu's collapse, one of the biggest was TPG (Texas Pacific Group), the private-equity firm that was the lead investor when WaMu raised some $7 billion of equity earlier this year. TPG lost $1.3 billion with the federal seizure.
There's been speculation that big private-equity firms like Blackstone and KKR stand ready to help recapitalize the banking system if only the government would loosen restrictive rules on investor stakes in banks. But the TPG losses undoubtedly will give pause to private-equity firms before they plunk money into faltering financial firms.
By LAWRENCE C. STRAUSS and ANDREW BARY | MORE ARTICLES BY AUTHOR
Or copy the rss link:
THE DIVISION BETWEEN THE STRONG AND THE WEAK in banking is coming into sharp relief after JPMorgan Chase 's stunning deal for the failed Washington Mutual.
Shares of JPMorgan Chase (ticker: JPM) jumped 11% Friday, as investors applauded the latest bold move by CEO Jamie Dimon. Strong brethren like Wells Fargo (WFC) also rallied.
[Dimon photo]
Carol T. Powers/Bloomberg News
JPMorgan chief Jamie Dimon has again walked away with attractive assets at what seems a good price. The WaMu deal also creates a bi-coastal behemoth.
But the deal, which came in tandem with WaMu's seizure by the government, sent shockwaves through the stock and bond markets as investors speculated about which banks would fall next.
The two most prominent potential casualties were Wachovia (WB) and National City (NCC). Wachovia shares closed at 10 Friday, down 27% on the day, and another 12% after hours. It reportedly was in talks to be acquired by Citigroup, Wells Fargo or Banco Santander of Spain.
National City closed at 3.71, down 26%.
The WaMu seizure, by far the largest ever, was a rude reminder that shareholders aren't the only investors who suffer in government takeovers. With WaMu, the victims also include preferred holders, who are apt to be wiped out. Holders of some $30 billion of WaMu debt are expected to suffer sizable losses. The company's senior debt traded anywhere from 20 to more than 30 cents on the dollar, down from 80 recently.
Unlike a host of financial firms, which have been decimated by credit-related write-downs and attempts to raise more capital, JPMorgan Chase has seen its shares hold up relatively well. In fact, it announced Friday that it raised an additional $10 billion in common stock, strengthening its balance sheet on the heels of a $31 billion write-down of loans acquired from WaMu.
[WAMU stk cht]
Investors and analysts were quick to applaud the WaMu acquisition, for which JPMorgan Chase paid $1.9 billion. It said the deal, which gives it a presence in some key states, should boost its profits right away.
"The strategic merit of the deal is bulletproof," says Jeff Arricale, portfolio manager of the T. Rowe Price Financial Services Fund (PRISX). "The financial merit of the deal makes sense in all but the most severe recessionary scenarios."
[chart]
The deal will make JPMorgan Chase the industry's largest holder of deposits -- at a time when the stability of deposit-based financing is coveted. "Deposit franchises are where you want to be right now," says Dave Ellison, who runs the FBR Large Cap Financial Fund (FBRFX), pointing also to Wells and Bank of America (BAC) as other examples. "Those are the companies you want to own."
Because WaMu is a thrift, JPMorgan Chase is not subject to a law that prohibits banks from having more than 10% of the deposit market nationwide. The WaMu deposits total about $170 billion. JPMorgan Chase plans to cut about 10% of its combined network of 5,410 branches.
"Strong firms are taking advantage of market dislocations, and the strong will only get stronger in this environment," says Jerry Senser, chief executive of Institutional Capital.
The deal will give JPMorgan Chase a strong presence in the lucrative California and Florida markets, where it largely has been absent. "It would be very hard for us to replicate this by building it ourselves," Mike Cavanagh, JPMorgan Chase's chief financial officer, tells Barron's.
Goldman Sachs analyst William Tanona projects JPMorgan Chase will earn $3.95 next year, up from his previous estimate of $3.45. But in a note dated Friday, Tanona lowered his third-quarter and 2008 estimates, citing the "the more challenging current environment."
The Bottom Line
Banks with big deposit bases and stable franchises -- like JPMorgan Chase, Wells Fargo and Bank of America -- seem like the best bet for investors as the financial storms intensify.
JPMorgan Chase's shares do look reasonably priced. They fetch about 1.1 times book value, well below their five-year average of 1.4, says Tanona.
The WaMu takeover was not a repeat of JPMorgan Chase's deal for Bear Stearns. There, shareholders got about $10 a share, while preferred and debt holders came out whole. That may have given investors a false sense of security.
Among the many losers from WaMu's collapse, one of the biggest was TPG (Texas Pacific Group), the private-equity firm that was the lead investor when WaMu raised some $7 billion of equity earlier this year. TPG lost $1.3 billion with the federal seizure.
There's been speculation that big private-equity firms like Blackstone and KKR stand ready to help recapitalize the banking system if only the government would loosen restrictive rules on investor stakes in banks. But the TPG losses undoubtedly will give pause to private-equity firms before they plunk money into faltering financial firms.
